No More Moody Blues, For Now

After many nail biting months, South Africa has been offered a reprieve. On Friday 23 March, Moody’s reaffirmed our investment-grade rating and revised our credit outlook to stable from negative, boosting President Cyril Ramaphosa’s efforts to restore the integrity of key state-owned institutions.

The damage to the South African economy, brought on by nine years of inefficient and often corrupt government, was almost irreparable, resulting in S&P downgrading our local currency debt to junk in November 2017. Had Moody’s done the same, massive capital outflows would have ensued, and the rand would have weakened. Fast. Imported goods and overseas travel would have become less affordable, and the cost of debt would have escalated. More businesses would have shut down and the economy would have taken years to recover.

Fortunately, Moody’s placed South Africa under review until after the budget, averting the R100 billion sell-off that would have followed our exclusion from Citigroup’s World Government Bond Index. Ramaphosa’s rapid ascendancy to power, coupled with his swift action in firing the board of Eskom, sent the right message. A fair, albeit slightly controversial, budget, followed by the suspension of SARS commissioner Tom Moyane, showed a commitment to restoring normality.

Although the currency market had largely priced in the good news, the rand strengthened further. At its current level of 11.64 to the US $, our currency has strengthened close to 20% since its November low of 14.46, with global factors also playing a significant role.

So how does this translate to investors?

Lower inflation, a strong rand, and signs of an improving, though still-fragile, economy have strengthened the case for a further cut in interest rates.

Those dependent on the interest they earn on cash deposits will see their incomes reduce. As an investment class, cash will become even less attractive. Where it has been judiciously hoarded to take advantage of buying opportunities in equity markets, there is certainly a stronger case to invest now in the wake of recent sell-offs.

For those with high debt levels, the anticipated cut of 0.25% in interest rates will equate to a reduction of around R167 a month on a bond of R1 million. That equates to a saving of nearly R85,000 over a 20-year term. Add the saving on your credit card debt and overdraft, and reducing your debt looks like an attractive option.

The good news comes with a warning though. A resolution to the mining charter impasse, as well as a balanced approach to the land restitution issue, will test the new administration’s ability to address conflicting political priorities.

As an emerging market, our currency remains vulnerable. Investors still needing to diversify offshore should consider taking advantage of Rand strength to externalise funds, although only as part of a well-considered strategy.

A more positive outlook for South Africa in general is good for local companies, reducing unemployment and crime, and increasing consumer expenditure. All of which could make for interesting times in the lead-up to the 2019 elections.